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On August 10, 2022, the U.S. Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) jointly adopted proposed amendments to Form PF that would significantly expand reporting by private equity advisers and hedge fund advisers of both their investments and structures (the “Proposal,” available here).  The Proposal is part of an ongoing effort to bolster the SEC’s regulatory oversight of private fund advisers and investor protection efforts, while also purportedly enhancing the Financial Stability Oversight Counsel’s (“FSOC”) ability to monitor systematic risk. …
Continue Reading Form PF, Take Two: The SEC and CFTC Propose Further Amendments To Reporting Obligations For Private Equity and Hedge Funds

On August 1, 2022, Robinhood Crypto LLC (“RHC”) entered into a Consent Order with the New York Department of Financial Services (“DFS”) based on “serious deficiencies” related to anti-money laundering (“AML”), cybersecurity, and virtual currency that were identified in DFS’s examination of RHC covering the period from January to September 2019.
Continue Reading DFS Enters Consent Order with Robinhood Crypto for Deficiencies in AML, Cybersecurity, and Virtual Currency Compliance

On June 13, 2022, the Securities and Exchange Commission charged three Charles Schwab investment adviser subsidiaries—Charles Schwab & Co., Inc.; Charles Schwab Investment Advisory, Inc. (“CSIA”); and Schwab Wealth Investment Advisory, Inc. (“SWIA,” and together with Charles Schwab & Co., Inc. and CSIA, “Charles Schwab”)—with violations of the Investment Advisers Act of 1940 for alleged misconduct associated with its robo-advisor, Schwab Intelligent Portfolios (“SIP”).  Unlike most other robo-advisers, Charles Schwab did not charge an advisory fee for the SIP service.  However, Charles Schwab required its SIP clients to hold pre-set amounts of cash—rather than investing in equities under market conditions where equities were outperforming cash—that was then loaned out by Charles Schwab Bank at higher interest rates than it paid to the SIP clients, resulting in a profitable spread for Charles Schwab and the equivalent of a hidden fee for its clients, since holding cash lowered their returns.  Charles Schwab was ordered to pay almost $46 million in disgorgement, more than $5 million in prejudgment interest, and $135 million as a civil penalty.  The $187 million in total sanctions will be returned to investors.  Charles Schwab also agreed to an independent consultant to conduct a “comprehensive review” of its compliance policies, and agreed to provide ongoing cooperation to the SEC in an unusual provision—a sign that there may be additional charges yet to come.
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Continue Reading SEC Brings Robo-Adviser Case Against Charles Schwab for Misleading Clients About Hidden Costs

On June 8, 2022, the SEC announced a notable settlement with national audit firm CohnReznick LLP, charging it with failure to uphold several professional standards during its 2017 audits of two public companies that had previously been sued by the SEC for accounting fraud.  In its order, the SEC specifically alleged that CohnReznick violated professional standards and contributed to materially misleading financial statements by, among other things, failing to exercise sufficient professional skepticism and accepting assertions from company management without sufficient supporting evidence.  The SEC fined CohnReznick $1.9 million, levied fines and suspensions against several of its audit partners, and imposed an independent consultant with a sweeping mandate to demand various audit-related and internal process reforms and veto new audit clients.  This action is consistent with the SEC’s repeated warnings that “gatekeepers” such as auditors are in the agency’s crosshairs.
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Continue Reading SEC Imposes Penalties and Sweeping Independent Consultant on CohnReznick for Alleged Audit Failures in Case Underscoring SEC’s Focus on “Gatekeepers”

On June 7, 2022, the Securities and Exchange Commission announced that it had charged software company Synchronoss Technologies, Inc. and seven of its current and former employees in connection with an alleged long-running accounting fraud involving improper revenue recognition of more than $46 million across six quarters.   All of those implicated settled with the SEC and agreed to pay a range of penalties, except for the former CFO and controller, who will litigate against the SEC in New York federal court.  Synchronoss was ordered to pay a $12.5 million penalty.
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Continue Reading SEC Accounting Enforcement Action Signals Heightened Focus on Individual Accountability and Puts Public Company Executives on Notice for Potential SOX 304 Reimbursement

On May 25, 2022, the U.S. Securities and Exchange Commission (“SEC”) proposed amendments to rules and related reporting forms under the Investment Advisers Act of 1940 (the “Advisers Act”) and the Investment Company Act of 1940 (the “Investment Company Act”) that are ostensibly intended to provide additional transparency regarding the use of environmental, social, and governance (“ESG”) factors by investment advisers and investment companies (the “Proposal,” available here), but which will also give SEC Examination and Enforcement staff additional tools to track and target advisers and funds pursuing an ESG strategy.
Continue Reading New ESG Rule Proposal Raises the Stakes under SEC’s New Marketing Rule

On May 23, 2022, the Securities and Exchange Commission (“SEC”) announced the inaugural enforcement action against an investment adviser by its much hyped ESG Task Force.[1]  As expected, this case does not find fault with the concept of ESG or conduct suggesting actual wrongdoing.  Instead, consistent with bread and butter policy for the SEC’s Enforcement Division, the SEC charged BNY Mellon Investment Advisers (“BNYMIA”) for failing to act consistently with its ESG disclosures to investors and having inadequate policies and procedures to prevent the misleading disclosures.  While the penalty of $1.5 million could be seen as small for this SEC, BNYMIA was charged with negligent fraud under Section 206(2), Section 206(4) and Rule 206(4)-8 under the Advisers Act, in addition to compliance violations.
Continue Reading SEC’s ESG Task Force Comes Out Swinging with Inaugural Enforcement Action Ahead of New ESG Disclosure Rules

On March 30, 2022, the U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”)—formerly the Office of Compliance Inspections and Examinations—released its 2022 Examination Priorities (“2022 Priorities”).  The Division is undergoing extensive leadership changes, with the recent departures of several top officials.  Consistent with the aggressive agenda set by Chair Gensler for the SEC generally, the Division has returned to its pre-pandemic caseload, conducting over 3,000 exams in fiscal year 2021, issuing over 2,000 deficiency letters, and making 190 referrals to the Enforcement Division.  Despite the management changes, the 2022 Priorities generally retain perennial risk areas as the core focus, but include several new and emerging risk areas reflecting the policy goals espoused by Gensler in recent proposed rule releases and public statements.
Continue Reading SEC Division of Examinations Reinforces Gensler Initiatives in its 2022 Exam Priorities

U.S. federal and state authorities recently announced actions that are designed to give effect to economic measures taken against Russia and hold accountable those who violate U.S. laws.  These developments suggest that U.S. authorities’ focus on enforcing U.S. sanctions and export controls, anticorruption and anti-money laundering laws, and the growing scrutiny of cryptocurrency, will continue.  They also point to further coordination and cooperation between authorities in the U.S. and other jurisdictions in investigating and prosecuting violations of their respective laws.
Continue Reading Authorities in U.S. Take Steps to Strengthen Enforcement of U.S. Measures Against Russia

The SEC and a consortium of 32 states recently announced a $100 million settlement with BlockFi Lending LLC over its crypto lending product, BlockFi Interest Accounts. The SEC alleged BlockFi had violated the securities laws by failing to register its interest-bearing crypto lending product as a security, failing to register itself as an investment company,…